The Best Real Estate Investing Strategy

Real estate investing is an amazing way to achieve financial independence. But the umbrella of real estate investing contains dozens of different ways to make money (i.e. strategies). How do you focus and choose the best strategy for you?

While there is not one best real estate strategy for everyone, there is one strategy that will work best for you right now. I wrote this guide to help you figure that out.

The guide is meant to be a practical tool where you apply what you read to your real estate investing. So, you will get the most out of it by pulling out a pen and paper and brainstorming. At the least, turn off other distractions for a few minutes so that you can think a little deeper about your own situation.

I’ll begin by explaining the five wealth stages of the financial mountain.

The Five Wealth Stages

Wealth building is a lot like climbing a mountain. Most of us begin at the bottom with very little wealth. But as you climb higher on the mountain and your wealth grows, you begin having money work for you instead of simply trading your time to earn money.

Ultimately you reach the peak of the mountain where your wealth produces enough income that you no longer need to actively work for money. You can still work, of course, but now you work completely on your own terms. And you can afford to spend more time on personally rewarding activities like time with family, travel, new hobbies, volunteering, or whatever matters most in your life.

As you climb, you’ll pass through five different wealth stages on the way to the peak. You can look at these stages as financial milestones.

Survival is the milestone when you’re earning some money and getting your bills paid. It’s also the place where you’re digging yourself back out of financial holes you dug in the past.

Stability is like Dave Ramsey’s first three baby steps. You pay off personal debts. You build cash reserves in the bank. And you build job skills that are in demand and command a better income in the marketplace.

Saver is the stage where you realize the importance of your savings rate and put it into practice. Building wealth is actually simple, but it’s not easy. You need to maximize your income, simultaneously decrease your spending, and set aside a lot of money. Below-average wealth builders save 0-10% of their income, but above-average wealth builders save 25%, 50%, and even 75% of what they bring in. The faster you want to reach financial independence, the more you need to save.

Growth is the stage most of us think of as investing. It’s taking your $50,000 nest egg and turning it into $1,000,000. The key is to maximize compounding by reinvesting earnings, buying good assets, and maintaining discipline.

Income is the stage when you already have a large chunk of equity, and you’re ready to enjoy the fruits of your wealth-building labor. The objective here is to turn equity into regular income that gives you time, freedom, and flexibility.

Understanding the concept of wealth stages is particularly important as a real estate investor. Your current wealth stage determines in large part which of the dozens of possible strategies are a good fit for you. A certain real estate strategy might sound good on a late night infomercial, but unless it matches with your wealth stage, it’s likely a waste of your time, energy, and money.

So, now for the important question. Which of the five wealth building stages above best describe you? Are you in the stage of survival, stability, saving, growth, or income?

For now, just choose the stage that best fits you. And don’t beat yourself up wherever you are. Everyone has to climb the same mountain, and the fact that you’re doing it now is all that matters.

Later in the article, you’ll see how your stage affects your choice of strategy .

Investing Strategies – The Routes Up the Mountain

If wealth stages are the milestones during your climb, a strategy is your plan for how to get up there in the first place. It’s like a particular route that will take you towards the peak of the financial mountain.

When you play Monopoly, you may begin with a certain strategy, like purchasing all of the green and yellow properties and building houses and hotels on them. The strategy may change as the game progresses, but in the meantime, it helps you take action with a purpose.

In real-life real estate investing, your strategy helps you focus. You can’t be successful trying to be good at too many things. Instead, it’s better to choose and master one strategy at a time.

Keep in mind that later you can move on to different strategies if you want. But initially, too many strategies on your plate will just dilute your effectiveness.

Here are the primary real estate investing strategies.

Fix and Flip is the strategy of finding real estate that needs work, buying it at a depressed price, fixing it up, and reselling it quickly (typically within 3-6 months) for a profit.

Wholesaling is the strategy of finding real estate deals at low prices and then quickly reselling them to landlords or flippers for a relatively small markup in price (although large profits are possible).

Buy and Hold Rentals is the strategy of owning real estate with the intention of renting it to generate income. The benefits of this strategy include rental income, tax shelter from depreciation expenses, amortization of loans, and price appreciation.

Private Note Investing is the strategy of financing real estate for others. Essentially you become the bank, and you receive interest in exchange for extending credit to the borrower. Borrowers can come from any of the above investment strategies, as well as owner-occupant borrowers. Before loaning to owner occupants, however, be aware that there are many more restrictions and laws that must first be learned.

Each of these strategies can lead up the financial mountain. Each of them has its pluses and minuses. But it’s likely that one of them is the best place for you to start.

Now let’s begin matching your particular wealth stage to a strategy.

Matchmaking Your Wealth Stage and Strategy

Let’s pause and think about your situation. Did you figure out your wealth stage earlier? If not, go back and do it now.

I’ll wait!

Here are some ideas for how to match your wealth stage to a general real estate investing strategy.

Stages #1 & #2:

If you’re working on wealth stages #1 or #2 (Survival or Stability), you need a job or a simple side-business more than you need investing. Investing takes your cash, and you need to put more cash in your pocket right now.

Wholesaling could also be a viable strategy at this stage if you are good at sales and have a lot of free time. But I find it’s not always the best place to start for many new investors. It’s more of a niche business for people especially suited for it.

The main point at this stage is to build your financial foundation. If you try to climb too quickly before you’re ready, you’re likely to slide back down and never make it to the top.

Stage #3:

If you’re working on wealth stage #3 (Saver), increasing your current income should also be a focus. But now that you have a more stable foundation, it might be time to begin the fix and flip strategy. A great way to start is by flipping your residence (i.e. live-in flips). By doing this strategically, you could own your home free and clear of all debt after just a few moves! Or you could transfer this wealth into other strategies.

If you want to flip houses other than your home, you may need to leverage the down payment and reserve money of partners or private investors. Things can go wrong buying and selling real estate, so it’s better to give away more of your profit to partners than to run out of cash and slide back down the mountain.

At stage #3 you could also begin to buy and holdrentals. Rental real estate is a great forced savings plan. Many people say it’s bad that real estate is illiquid or hard to sell. I say it’s GOOD. You’re forced to leave it there and not spend it!

My favorite place to start with buy and hold rentals is house hacking. This means you rent out extra bedrooms or units in your residence to help cover your expenses. You could also move out of your current residence and keep it as a rental (as long as it cash flows). With low-interest, fixed financing in place, this can become a perfect long-term rental.

Stage #4:

If you’re working on stage #4 (Growth), you should have the credit, income, and capital to jump into real estate investing in earnest. You could focus on the strategy of fix and flip or buy and hold rentals.

With buy and hold rentals, choose a more specific method of growth within the larger buy and hold strategy. Some of my favorites are the debt snowball plan, the buy 3-sell 2-keep 1 plan, and the all-cash plan. All of these are specific strategies to consistently and relatively quickly climb the financial mountain with rentals.

If you own an IRA (Individual Retirement Account) at stage #4, you should also consider the strategy of private notes. Certain custodians (I use American IRA) allow you to self-direct your retirement accounts into alternative investments. This means you don’t just have to use the traditional options of mutual funds, stocks, and bonds.

Private notes (i.e. loans) make the ideal IRA investment because you avoid many of the complexities and risks of actually owning the real estate. Also, the interest you earn on these notes is not taxed because it all stays inside your retirement account. Through the power of compounding, your retirement account can then grow at a much faster pace.

Keep in mind that private notes have their risks. You should always prepare for the worst-case scenario, which means you could stop receiving payments. You’d then have to foreclose and become the owner. If you don’t want to own the real estate for the amount you loaned, don’t loan the money. And when you do make a loan, use a qualified attorney to prepare your lending paperwork.

Stage 5:

For stage #5 real estate investors, the priorities are more income, less hassle, and less risk. Growing wealth can still be a long-term goal, but now it’s time to enjoy the wealth you’ve built. To do that you need free time and free cash flow!

Buy and hold rentals are still a viable strategy here. But you may want to focus on using less leverage in order to increase your cash flow and decrease your risk. You could use a free and clear plan to figure out how many properties without debt you need to meet your life goals. If you want to maintain some leverage, you could own some properties free and clear for maximum cash flow. But then you could own other properties with safe, long-term mortgages to hedge for growth. The main point is to reduce your overall ratio of leverage as a portion of your entire portfolio.

Using private notes is also an interesting option at this stage because it matches your need for solid income with low-hassle investments. Just make sure to set aside plenty of reserves in case you need to foreclose on borrowers who do not fulfill their end of the bargain.

Clarity Breeds Confidence

When you first start (or restart) real estate investing, overwhelm and paralysis are the enemies of your future success. When you are overwhelmed, you don’t take action. And if you don’t take action, you’ll never make progress or learn the most important lessons that can only be discovered out in the field.

Choosing a strategy will help you avoid overwhelm. It will help you focus, and as a result, you’ll gain clarity and confidence.

A strategy certainly isn’t all you need to know about real estate investing. It’s only the beginning. But it’s a good start. And if you’ve followed along with this exercise to figure out your own wealth stage and real estate investing strategy, the next steps that you need to learn will become clearer for you.

I appreciate you allowing me to help guide you in your real estate investing. In the near future, I’ll bring you the next steps of the journey, like how to determine your real estate niche (i.e single family, multifamily, mobile homes, short sales), how to analyze good property criteria, and how to understand the terms that will make you money.

Are you climbing the financial mountain? What is your wealth stage? Which strategy makes the most sense for you? Have you used other strategies in the past that have worked or not worked?

I look forward to hearing from you in the comments below.

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Comments

First off, I love the mountain climber drawings! (It’s an analogy close to my heart.) 🙂 I appreciate how you explain things in real estate, and acknowledge that some people may not want to be leveraged to the gills. We’re starting to consider diversifying with another rental beyond our one SFH, but it’s definitely intimidating to get started! And the market is lopsided around us, so we’ll probably have to look farther afield — even more intimidating! I could definitely see us paying all cash for another rental at some point, and based on other RE bloggers I’ve read, that idea would make their heads explode! Thanks for making space for the debt-averse in this conversation!

I thought you and some of our other outdoor/climbing blogger friends might like the mountain:) Mountains are just wonderful metaphors in so many ways.

I hear ‘ya on the leverage debate. I’ve certainly used my share of leverage, but I love the simplicity and power of free and clear investing. And buying real estate with no debt still has MANY advantages. First and foremost you get a lot of income. A standard deal in many markets would be a 6% yield. That sure beats a lot of other investment options out there! And you can still shelter some of the income using depreciation, and property appreciation doesn’t go away just because you invested with no debt.

At some point, particularly for early retirees like us, growth become a lower priority and simplicity and low-risk investing moves up in priority. Less debt helps accomplish those priorities. I do love playing the real estate game, and deals seem to keep following me around these days! But a portfolio with lower and lower ratios of leverage are definitely in my plans.

Thanks for commenting! Glad to hear we can have some real estate conversations among others.

Its a great article, Chad. It provides a wonderfully simple to understand approach to the world of real estate investing. I think both new comers and salt horses alike, will gain tremendous focus and clarity of mind from it with respect to where they stand at present, where they are headed and how they should get there.

Its a pleasure following your blog as your insights always make for good and interesting reading.

This is a great post. As you know, I have had some visions of getting involved with real estate dancing in my head, but I have been having trouble figuring out where and how to get started. I look forward to having some time to discuss this with the Mrs and dive deeper into the links associated with our specific stage(s). This is really helpful to provide a framework for our thought process. Thanks!

Another great article Chad! I love the graphics. A clear way to visualize moving up the wealth ladder. It’s definitely helpful to know what strategies make sense depending on your current financial stage and capability. I’m in stage 4 and focusing on buy and hold.

Thank you, Claudia! My graphics aren’t fancy, but I figure my little drawings are like a teacher drawing on the white board. Simple and to the point! Glad to hear you’re clear on your stage and strategy. I’ll be sharing some more nuances soon about real estate property niches and how to zoom in even more based upon those basic two categories you’ve listed. I appreciate your comment!

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